Tax Investigations – The New Regime

I need to make you aware of the new HMRC investigation regime that came into being in April 2010. This was driven by the old Labour government’s need for cash – but there is no sign yet that the new Coalition will change anything.

HM Revenue and Customs have been charged by the government with two main aims. One, to cut costs and Two, to extract much more money from us tax payers. So as staff are cut, how can they achieve their other aim of increasing revenue?

The simple answer is by looking at things they never used to bother with during tax investigations, and combine this with a general tactic of going back for 20 years instead of the old 6 years.

I touched on this briefly in my post in March 2010 (before the election) but you need to know more about the extent of the new changes and how they are likely to be implemented. There are new penalties for every aspect of tax and PAYE and if the law is found to be wanting and against the Tax Office view – they will simply change the law and apply it retrospectively to catch us out and maximise their revenue.

One of the “soft” areas they are changing is Private Proportions. This is the adjustment your accountant makes for things like private use of motoring; private hp interest; use of home as office; bank charges (if you are drawing more than your profit causing the business to run in overdraft); protective clothing and laundry – to name but a few.

The reason is those things are hard for the unprepared tax payer to justify several years later. For example, can you prove your private motoring was only 10% of the total cost as your accountant adjusted for? Do you keep detailed records of your business journeys on a day by day basis? Can you prove the adjustment for 10% shouldn’t be 50%? It doesn’t sound much but if your motor expenses are £3,000 in a year, your accountant may have added back 10% for private use – £300 – but the Tax Office say 50% is fairer – £1,500. You have an increase in your taxable profits of £1,200 immediately. Then this gets applied back over 20 years and the figure becomes £24,000 extra taxable profits. Then penalties and interest are added and you can see why this sort of “soft” area is going to become so popular – look at the amount of revenue a simple adjustment can result in.

You need to talk to your accountant about this asap. You should ensure your records are contemporaneous (kept daily), and will stand up to scrutiny several years later. Failure to do this – as indicated above – can be fatal for you and your business.

They are also removing established P11D dispensations and not granting any new ones – forcing everyone to start preparing P11D’s where none were due previously each April.

The last straw for me is the removal of a concession called “Equitable Liability”. This used to be a last ditch defence against a basically honest tax payer being overwhelmed by their tax commitments (for a variety of reasons) and not dealing with them on a timely basis. A claim under this concession would allow someone whose tax affairs had become a mess (often through no fault of their own) to tidy things up and pay the tax that would have been due if their affairs had been dealt with properly at the time. It doesn’t sound much but if you had become ill and unable to deal with things for a few months – it was a beacon of common sense in the system and a defence against punishing penalties, interest and determinations that had been issued. But no more.

Lots of these things have been slipped in with no real announcements and are designed to catch us taxpayers unawares – it has to be said, much to the government’s benefit. There are even penalties now if you are late paying the monthly PAYE/NIC for your employees each month. It must be with HMRC and cleared by the 19th of each month – were you aware of that? Penalties apply if you miss this date each month.

There are also major changes to the old “subcontractor/employee” arguement but I will deal with this in a seperate post shortly – it is a minefield in it’s own right.

Please do not hesitate to contact me if you have any questions or concerns about any of the matters discussed above on 0800 047 0731.

I am a qualified Certified Practising Accountant having passed my final exams way back in 1981. I actually can’t believe that was 37 years ago!! Anyway, I am now in my 60’s and I have been running my own business since May 1983. And before you ask, no, I have never regretted a moment of it!
Part of the membership requirements of my professional body now dictate that I spend quite a lot of time on “CPD” - continuing professional education (one of their better ideas) - and over the last two years I decided to study business growth and marketing.
I have learnt such a lot and that knowledge has radically changed my old “accountants” approach to business. It has made such a difference to the way I work and operate I feel that I just have to pass on this knowledge. It is simply too powerful to hold back!! - but I will try and do it in simple terms rather than expecting you to spend hours, as I had to, working through the difficult language that trainers seem to use to pass on their concepts.
I hope you find the blog a useful resource and interesting place to visit as the months pass. I will do my best to keep up the flow - but if there are any topics you would like me to cover, then please let me know.
Ray Stewart